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Prolonged Monetary Policy Tightening Could Exacerbate the Decline in Housing Prices in Advanced Economies

A more aggressive and prolonged monetary policy tightening in Canada, the United Kingdom, and the United States during 2023 and 2024 would likely have a negative impact on housing prices and on economic growth. Current market expectations are for these respective countries' central banks to significantly slow or pause their rate hike cycles in coming months. If this assumption proves incorrect and interest rates continue to move higher, this could weigh not only on investment but also on consumer confidence, which in turn could hamper housing markets this year and next. In such an adverse scenario, we project that the three economies would experience a recession this year with a slow recovery starting in mid-2024. This exercise is constructed as an adverse scenario using a set of fairly negative assumptions, but at the same time, we see some material risk of prolonged inflationary pressures (possibly combined with policy errors) that could push interest rates higher, leading to weaker economic performance and other downside risks to these and other similarly situated advanced economies.

• Higher interest rates could result in severe house price corrections in major economies.
• Canada's house prices decline would be significant this year and, with a lag, in the UK, while the impact in the US is expected to be milder.
• In all three economies, GDP growth could decline by 0.3 to 0.5 percentage points in 2023, and between 1.1 to 2.5 percentage points in 2024.

“Higher interest rates and weakened consumer confidence, result in sharper housing price corrections particularly in Canada in 2023, while in the UK the impact would be more intense in 2024 and in the US, a more moderate correction,” said Javier Rouillet, Vice President, Global Sovereign Ratings at DBRS Morningstar. “Nonetheless, a significantly greater housing downturn would be necessary to jeopardize financial stability, and our modeling suggests this hypothetical scenario would at worst only undo the significant appreciation in the housing market since 2020” said Carlo Capuano, Senior Vice President, Global Sovereign Ratings.